The Association between Management Earnings Forecast Errors and Accruals: Case of Iran

Abstract

The purpose of this paper a survey on the relationship between errors in management forecasts of subsequent year earnings and current year accruals at the level of active companies and industries in Tehran stock market. In an uncertain operating environment, managers’ assessments of their firms’ future perspective is usually imperfect. This problem has a decreasing effect on both accruals generation and earnings projection. We hypothesize that management earnings forecasts exhibit greater optimism (pessimism) when accruals are relatively high (low). This paper is based on 124 companies working for 17 industries from 2003 to 2009 using multiple regression analysis of panel data. The results show that there is a positive significant correlation between errors in management forecasts and the accruals, both at the level of companies and active industries in the Tehran stock market. This significant positive correlation is stronger for firms operating in a more uncertain business environment and for firms in industries exhibiting greater covariation between accruals and growth-related activities.

Keywords: management earnings forecasts, accruals, earnings forecasts error.